Has this ‘model’ member of Europe turned rogue?

Poland's economic growth pre- and post-crisis puts Western Europe to shame, but concerns are rising about its latest political direction.

The euroskeptic, pro-Catholic and highly conservative Law and Justice Party was elected in October with an overall majority. It has moved quickly to increase control of Polish institutions, provoking alarm among officials of the European Union (EU), of which Poland is a member.

Wotjek Radwanski | AFP | Getty Images

Jaroslaw Kaczynski, leader of Poland's ruling Law and Justice Party, gives a speech during a pro-government demonstration.

The party has replaced several public officials and the heads of the Warsaw stock exchange and some large state companies with party loyalists. It has also filled the constitutional court with its supporters and changed the rules to require a two-thirds majority to overturn any law, making it hard for the court to challenge party-backed legislation. The party is also pushing through legislation to gain control over the leadership of public broadcasters

Market impact

Polish financial markets have reacted to the political developments. The zloty has fallen against the U.S. dollar and the euro since mid-December when the law affecting the constitutional court was passed. It has declined 1.8 percent against the euro zone currency since the start of 2016.

The WIG index, which tracks all companies listed on the Warsaw stock exchange main list, is down 4.9 percent since the year started and around 14 percent lower since the Law and Justice party was elected in late October.

"I think markets are waking up to rising political risk in Poland. Nothing on a scale like Brazil or South Africa. More like Hungary. I think investor sentiment has been dented by the Law and Justice government," Win Thin, global head of emerging markets foreign exchange at BBH, told CNBC this week.

Franck Fife | AFP/Getty Images

A market in the center of Warsaw, Poland.

Like Hungary?

Hungary is a noteworthy comparison, as the country's authoritarian lurch under Prime Minister Viktor Orban over the last five years led the European Commission (the executive arm of the EU) to adopt new laws in 2014. These laws allow European officials to monitor member states and ultimately withdraw their voting rights if they pursue undemocratic policies. This is yet to happen to any member, but is a putative threat for Poland, with the European Commission set to debate on January 13 whether the "rule of law" is under threat in the country.

The president of Poland's ruling party, Jaroslaw Kaczynski, is believed to be a long-term fan of Orban. The two enjoyed a six-hour meeting "shrouded in secrecy" on Wednesday, according to the "Financial Times." Both Poland and Hungary were Soviet satellite states until 1989 and were among the mostly Eastern European countries that joined the EU in its latest major expansion in 2004.

These countries have been praised on the whole for their swift embrace of economic reforms in the wake of the 2007-08 global financial crisis. They have proved less amenable, however, to adopting "European" values of social liberalism, with both Hungary and Poland refusing to accept Syrian refugees as part of an EU quota system.

"Investors got used to a Brussels (EU officials' main base)-friendly Polish government and must now contend with a much more eurosceptic one," Nicholas Spiro of Spiro Sovereign Strategy told CNBC this week.

"Yet the previous coalition government could hardly be described as a radical reformer and was tainted by corruption scandals. The reality is that Law and Justice Party won a thumping majority and there is considerable support for its agenda among large sections of the Polish population."

Economic policy

Poland's economy has posted strong growth ever since the collapse of the Soviet Empire and is seen expanding by 3.5 percent in both 2015 and 2016, according to the International Monetary Fund.

Analysts forecast economic policy will remain largely unchanged under the Law and Justice Party, allowing for the possible slanting of public expenditure towards social benefits and the installation of more dovish policymakers in the central bank.

"All in all, I think fundamentals remain solid in Poland and so markets shouldn't be too concerned. However, it is just a gentle reminder that politics still matters for emerging market investing," BBH's Thin told CNBC.